Prospect of uncertainty looms despite early signs of market approval

Britain woke up to the prospect of four more years of David Cameron(Peter Macdiarmid/Getty Images)

Markets love certainty, and the Conservatives appear to have provided a large dose of it by winning a surprise majority.

Investors have signalled their approval with the FTSE rising by 1.85% while currency traders have piled back into sterling. Shares in energy firms and estate agents, such as British Gas owner Centrica and Foxtons, saw immediate rises as plans to freeze bills and introduce a mansion tax faded with Labour's defeat. Bank shares also rose as the prospect of further levies under a Conservative government diminish.

But what might be the longer term economic implications of five more years of David Cameron?

Howard Archer, chief economist at IHS Global Insight, said: "While the markets are likely to be happy with the election result in the near-term and the economy should benefit from the more stable result than had seemed likely, major questions remain further out that have the potential to be major causes of uncertainty and instability."

Archer points in particular to the prospect of an EU exit, with Cameron having pledged a plebiscite on Britain's membership by 2017, and warns that it could lead to "appreciable market and business uncertainty".

Jane Foley, senior currency strategist at Rabobank, said: "While the right-leaning Conservative party carries the mantle of 'business friendly', this position is currently clouded by the PM's pledge to hold a referendum on the UK's position with the EU in 2017. For many overseas investors this has been a weightier issue than the UK general election."

Barclays also cautioned that initial short-term cheer could be followed by a "chill" as the result of an EU referendum.

More immediately, there is the issue of tackling the UK's significant budget deficit and more cuts. It is predicted to come in at 5% of GDP this year and, in the last budget, £30bn of spending cuts were forecast by 2017/18.

Foley added: "These policies should weigh on growth and potentially on the Conservative's ability to sustain its narrow majority as by-elections crop up."

In addition, the Tories' fractious relationship with Scotland and the power of backbenchers also provide potential stumbling blocks to any policy implementation.

Most economists are unanimous that the Bank of England will hold off increasing interest rates until 2016, which would further push up house prices. While good news for homeowners, coupled with a housing shortage, it spells further difficulty for those looking to get onto the property ladder.

Russell Quirk, founder and CEO of eMoov.co.uk, said: "A recent poll of MPs and the general public found that many believe that Britain is currently experiencing a housing crisis. There is a rather strong argument that the current government's policies on the property construction, or lack of it, has contributed to this current crisis."

An EU exit, which would likely restrict immigration, could also have significant implications on demand for housing, causing prices to drop.

While certainty has been provided in the short term, there is plenty of long term ambiguity in the pipe line, with the next major trigger being the EU referendum.